Third-Quarter GDP Surges On Revision - December 5, 2013

The nation's gross domestic product (GDP), which had shown just a slight 1.1% gain in this year's opening quarter, then a 2.5% advance in the June period, initially noted a better-than-forecast 2.8% advance in the third quarter. Now, that period's estimated gain has been revised to show a much better-than-expected increase of 3.6%. Expectations had been for an upward revision to 3.2%.

Such a strong performance is further ammunition for those on the Federal Reserve who think that the central bank should start to taper its aggressive bond-buying initiatives. The next opportunity for such a move, which we think has a 50-50 chance of talking place, will be on December 18th, when the Fed will conclude its two-day FOMC meeting.

As to this report, which was issued along with encouraging data showing a drop below 300,000 in first-time unemployment claims, the data showed that the output of goods and services was underpinned by a larger-than-expected increase in private inventory investment. The growth in such stockpiles, which at some point--most likely the current quarter--will be worked down somewhat, could well hurt the presumptive increase in this period's aggregate output. For now, we think fourth-quarter GDP growth will have trouble exceeding 2.5%.

Meanwhile, this latest increase was the largest since the opening three months of 2012. The third-quarter gain also eclipsed, by nearly tenfold, the token uptick in last year's concluding stanza. In addition to the jump in inventory investment, the quarter also was helped by contributions from personal consumption expenditures, a deceleration in imports, and an acceleration in state and local government spending.

Looking at the report as a whole, although the greater accumulation of inventories gives something of a false reading--as this is not an indication, necessarily, of a sustainable strengthening in activity--the balance of the report was positive. It is now a question of whether or not the Fed sees enough overall strength in the economy to become slightly more restrictive in its monetary approach. We sense that tomorrow's report on non-farm payrolls and the unemployment rate will be more critical, but we shall see. If recent trends hold forth, the releases tomorrow should show some additional strength.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.